Anarchy in the U.K.

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The pall being cast by Brexit is putting CETA on the backburner for many Canadian shippers

Canada’s triumphant ratification of the Comprehensive Economic and Trade Agreement (CETA) with the European Union has been pushed aside by trade spats with the United States over NAFTA, as well as by their escalating trade war with China. Instead of pursuing new opportunities to trade goods and service with the EU’s 512 million consumers, many Canadian executives are re-examining existing deals with our largest trading partner.

Joy Nott, president of the Canadian Association of Importers and Exporters (I.E. Canada) sums up the shift by stating: “To deal with uncertainties over the future shape of NAFTA, Canadian importers and exporters now realize that for now, exploring for new CETA partners and deals has become job No. 2.

“After President Trump first announced and later cancelled imposing tariffs on steel and aluminum imports from Canada, many executives are waiting for the next shoe to drop. They are holding pens in their hands over contracts sitting on their desks but not signing them.

“There is uncertainty in both directions—potential tariffs on exports to the U.S. as well as retaliatory tariffs on imported raw materials and components. As a result, Canadian manufacturers are unsure how much to charge customers for products they will ship.”

As well, she believes that U.S. tax reform will affect production and trade decisions made here since many large Canadian corporations are in fact subsidiaries of U.S. conglomerates. Since Canada and the U.S. are neighbours and each other’s best customers, developing potential EU deals and partners across the Atlantic Ocean may have to wait.

Seafood bounty

But it is not all bad news. CETA has started opening doors wider for various Canadian products such as fresh Atlantic lobster.

“We have not seen any changes in the numbers [of live lobsters] sold, so it may still a bit too early to tell,” says Geoff Irvine, Halifax-based executive director of the Lobster Council of Canada. “But, anecdotally, we have heard that our fresh products are selling better in Southern Europe—Portugal, Spain and Italy—after the EU dropped the existing eight per cent duty. That makes Canadian lobsters more competitively priced. Also, our lobsters have a higher meat yield by weight than those from other countries. We already enjoy strong market sales in Northern Europe.”

Other lobster product sales will continue to grow. Irvine points out that CETA contains a duty-reduction schedule that will eliminate duties ranging from six per cent to 20 per cent on other items such as frozen whole and lobster parts as well processed items over the next three to five years.

A recent New York Times story confirms that trend when it reported that Nova Scotia has emerged as a fierce competitor to the state of Maine in exporting lobsters, particularly to Europe. Last year, American lobster exporters sold slightly more to Europe than their Canadian counterparts. But Nova Scotia will likely soon pass Maine’s numbers as a result of President Trump’s increasing aversion to trade deals which he believes harms American producers and workers.

However, other food sectors are progressing more slowly. CETA simply removes tariffs on various imported agricultural and food products. But lower prices alone will not necessarily change longstanding consumer eating and purchasing habits. In addition, each of the 28 EU members has its own set of labelling, content, health, environmental and other regulations.

And yet, today’s consumers everywhere are looking for new and more exciting products to buy when they go grocery shopping. Winning an international competition can help boost product recognition and sales. For example, Christian Sivière, president of Montreal-based freight forwarding consultancy Solimpex points out that Saint-Hubert, Quebec-based Agropur’s Camembert l’Extra, recently won first prize, besting 17 other products, at the World Championship Cheese Contest, held in Madison Wisconsin. But, he adds, they will still face stiff competition from existing EU cheese producers on their home turf. Some Canadian critics complain that cheese production in various EU markets is often supported by government subsidies which enable producers to purchase raw milk at less than market prices.

In the other direction, CETA’s introduction of geographical indicator (GI) labelling, such as Champagne, for sparkling wine produced in that region of France may create problems for Canadian exporters. Some Canadian firms have received domestic copyright protection for product names, which may cause confusion with traditional EU products that are protected by the new EU GI rules. For example, Maple Leaf Foods received a registered copyright for the name Parma Ham in 1971. The EU has provided GI protection for a similar product Prosciutto di Parma, produced in that region of Italy.

So far, it is still not clear how under Canadian intellectual property law a trademark can be repealed. If that happens, it may lead to legal action, not to mention confusion in Canadian and EU consumers’ minds.

Invariably, domestic laws and international agreements contain new and sometimes confusing sections. Under CETA, it’s the introduction of the so-called REX (Registered Exporter system) number. It requires EU exporters to register for and include it on recently introduced origin declaration enabling government inspectors to clear products for shipment. Says Nott: “It only applies to European exporters. Although it is easy to apply for, it has led to confusion among EU-based firms which have never had to deal with it before.”

For Canadian exporters, if a European importer requests similar proof, Canadian shippers can simply include their CRA business number in their origin declarations.

Brexit confusion

However, the darkest cloud hanging over CETA is Brexit—the United Kingdom’s decision to leave the EU. It poses very serious challenges to the basic concepts on which the 28-member European Union is based. Whether or not Brexit actually happens remains unclear. But the clock has already started ticking. The U.K. is scheduled to leave the EU in March 2019. But there may be a one-year grace period after that. But that date is not carved in stone, since it can be extended. As well, it may take a few years to implement the terms of the new agreement.

Adding to the confusion is the possibility—albeit remote—of a second referendum. A recent poll, conducted for the pro-remain groupBest for Britain, revealed that a majority of Britons support the idea of a second referendum on any final Brexit deal secured by Prime Minister Theresa May. With her calendar already full of Brexit-related negotiations, it is unlikely May will give into demands for another vote. Meanwhile, on the ground in the U.K., the country’s exit from the European Union has been supplanted as the biggest risk facing companies by potentially weaker growth in the economy, according to a survey of chief financial officers conducted by Deloitte.

At stake for Canada is not simply trade with the United Kingdom itself but also the U.K.’s role as a duty-free, convenient pass-through transshipment point for goods to and from the other 27 EU members.

“The United Kingdom remains the ‘crown jewel’ of our international trade,” says Nott. “After all, we have been doing business with them for more than 500 years. We enjoy a special relationship with it sharing the same language, culture legal system and business practices.”

But until the issue has been settled diplomatically or otherwise, Canadian executives need to develop plans and strategies to deal with uncertainties. Many of them will involve GRC, or governance, regulation and compliance—what used to be called red tape.

Bob Sacco, GTA trade and customs practice leader with KPMG LLP, expects that Canadian trade with an independent U.K. even without tariffs and duties will still encounter other bureaucratic barriers such as reviews of data and standards in sectors such as pharmaceuticals.

“Meeting such requirements could incur seven-figure expenses. Governments require data to ensure product quality, consumer safety and related issues. Currently the process relies on EU-established standards and rules. But if the U.K. leaves the EU, it will have to re-establish its own standards as well as rebuild and reorganize the supporting bureaucracy.”

These concerns are unrelated to customs or tariffs, but involve reassuring the public that imported products meet U.K. public safety and other standards. For other sectors it may involve protecting British producers from competing imports.

Setting up its own regulatory bureaucracy may result in new fees and even delays as the U.K. government incur added costs as they set up or expand their inspection and regulatory practices. This will replace the vast existing EU inspection and regulatory bureaucracy in Brussels. As well, since freshly minted U.K. officials may take more time to inspect incoming products to ensure exporters meet the new standards, such processes will likely add time and cost which will reduce the overall efficiency of shipping products to U.K. buyers.

Sacco also mentions that commonwealth countries such as Canada and Australia formerly enjoyed a preferential tariff for goods entering Britain. Such privileged access ended in 1973 when the U.K. joined the European Common Market. To regain that advantage, the current 53 British Commonwealth members may need to negotiate a new treaty to re-establish preferential trade with the U.K.’s 66 million consumers. Negotiating such a complex agreement may take time. After all, CETA took eight years of detailed discussions.

With Brexit hanging over their heads, U.K. companies themselves also are finding it harder to keep contracts or win new businesses in the EU. A recent Chartered Institute of Procurement & Supply (CIPS) survey found that close to 10 per cent have lost contracts or had them cancelled. Another 25 per cent say they have difficulty securing contracts extending beyond March 2019.

Domestic U.K. firms are also busy making Brexit-related adjustments such as downsizing. According to the CIPS survey, 23 per cent of U.K. companies intend to cut staff during the lead up to Brexit.

Any reduction in fast, smooth and low-cost links to the EU worries the British automotive industry. It lives or dies by ‘just-in-time’ and ‘just-in-sequence’ deliveries. But when Brexit takes place, it will likely lead to disruptions by breaking that chain. The Brussels-based European Automobile Manufacturers Association (ACEA) contends that additional post-Brexit customs checks will add costs, cause delays and hamper productivity. Such disruptions could also lead to assembly line stoppages.

Finally, depending on whether Brexit actually happens what the actual terms of the final agreement look like, Canadian executives may need to consider reconfiguring their supply and delivery chains with CETA trading partners. Their greatest fear is that a hard Brexit will eliminate the U.K. as a convenient transshipment point for the EU market or at least increasing the hassles of doing so.

Most mornings these days, when business decision makers wake up they are not eager to find out what happened in the world overnight.